A 'new,' privately held Seagate hopes to better storage position

Shorn of the need to disclose details of its operation to regulators, or answer prying analysts' questions, can the new Seagate Technology Inc. unveiled last week do a better job of just making and selling disk drives?

Some very smart people are putting a lot of money on that wager.

While the final shape of the new Seagate may not be known for another six months, the group of investors and senior managers who are taking the Scotts Valley, Calif., company private certainly know one or two things about complicated accounting.

The complex $20 billion transaction aimed at terminating Seagate's sojourn in the public arena involves Veritas Software Corp., which is 33% owned by Seagate, and an investment group led by Silver Lake Partners and Texas Pacific Group.

Under the terms of the transaction, Veritas has agreed to a stock-driven repurchase of its shares from the disk-drive maker. It will then spin out Seagate and its disk-drive operations for $2 billion, creating Silicon Valley's largest privately held company.

But Seagate is more than just a disk-drive manufacturer. Every share bought in the company also entitles the buyer to a stake in CVC Inc., Dragon Systems Inc., Gadzoox Networks Inc., and Sandisk Corp. This means that all these holdings have to be unloaded before the transaction can close.

Luckily, Veritas is more than willing to assume Seagate's interest in these companies, leaving Seagate free to fund a long-term growth plan in the storage and software business, the company's management said.

The decision was purely a financial one, according to Steve Luczo, president and chief executive of Seagate, responding to questions on why the company was being sold now that some stability has returned to the disk-drive market.

"[The timing of the sale] is a result of a lot of work by the board to unlock the existing value of the stock to shareholders," he said in a conference call. "The stock was trading at a substantial discount. The goal is [for Seagate] to remain the leading storage provider ... at the device level [and] at the component level."

The acquisition will take place in a two-step process. In the first stage, Veritas will buy back its shares, paying Seagate shareholders the equivalent of about $77.50 per share of Seagate stock, or 0.467 shares plus $5 per share in cash, based on the closing price of Veritas stock on March 28.

After that transaction is completed, Seagate's management and the group of investors will buy the disk-drive operations of the company, which will become a privately held concern and continue doing business under the Seagate name.

"The new Seagate will no longer be constrained by the ongoing pressure from investors to meet or beat estimates," said Dane Lewis, an analyst at Robertson Stephens Inc., San Francisco. "Unfortunately, this transaction significantly reduces the strength of Seagate's balance sheet. Cash will be reduced by approximately $740 million to $800 million."

Luczo said Seagate's worth now is estimated at $2 billion, including about $800 million in cash. The company will retain its brick-and-mortar manufacturing assets and core technology, including Seagate Software and Xiotech Corp., a wholly owned Storage Area Network subsidiary.